Central banks would threaten the global financial system if they issued their own cryptocurrencies

Will MartinMar 13, 2018, 14:31 IST

&quotCredit Crunch" chocolates are seen for sale in Selfridges department store, in London October 7, 2008. Britain will hold more talks with banks this week over a possible multi-billion pound injection of public funds, industry sources said as the credit crisis tightened its grip on Europe's main financial centre.Reuters/Stephen Hird

A new report from the Bank for International Settlements questions the viability of central bank issued cryptocurrencies.

The BIS report, written by a group of analysts led by the ECB's Klaus Löber and Aerdt Houben of the Dutch central bank, argued that were central banks to issue digital currencies, those currencies could become rivals to cash, which might lead to rising interest rates as money is pulled away from the commercial banking system.

"The introduction of a central bank digital currency (CBDC) would raise fundamental issues that go far beyond payment systems and monetary policy transmission and implementation," the BIS said in its report.

"A general purpose CBDC could give rise to higher instability of commercial bank deposit funding. Even if designed primarily with payment purposes in mind, in periods of stress a flight towards the central bank may occur on a fast and large scale, challenging commercial banks and the central bank to manage such situations.

"Introducing a central bank digital currency could result in a wider presence of central banks in financial systems."

This in turn could lead to a "greater role for central banks in allocating economic resources, which could entail overall economic losses should such entities be less efficient than the private sector in allocating resources."

"It could move central banks into uncharted territory and could also lead to greater political interference," the report adds.

Cryptocurrencies have entered the consciousness of central banks and their most senior officials over the course of the last couple of years.

Weidmann said he believes that central banks will eventually create their own digital currencies to reassure average citizens that such currencies are safe and stable, but in doing so could increase the risk of bank runs in future crises.

"Allowing the public to hold claims on the central bank might make their liquid assets safer, because a central bank cannot become insolvent," he said in a speech in June.